Umbach: European energy market requires clear rules

As long as no affordable electricity storage technology is available, energy supply security can only be guaranteed by fossil fuel-based power plants as a backup when no sun and wind are existing – writes dr. Frank Umbach, Research Director at the European Centre for Energy and Resource Security (EUCERS) at King’s College in London, who also attended a press conference organised by the Polish Electricity Association in Madrid dedicated to the issue of capacity market.

For these cases, capacity market mechanisms needs to put in place. Last February, the European Commission Approved 6 Electricity Capacity Mechanisms (CMs), which need to be divided into three different models:

Additionally to the strategic objectives of ensuring security of supply, the approved CM needs to preserve competition in the Single Market (preventing higher electricity prices). The Commission had been in close cooperation with relevant national authorities to ensure they meet strict criteria under EU State aid rules. Those EU State aid rules are important to ensure that CMs do not act as backdoor subsidies for specific technologies or cause other undue distortions of competition, or unjustifiable high electricity prices for private and industrial consumers.

The Polish CM is based on plans to introduce a market-wide mechanism for electricity supply of security, accompanied by market reforms. It takes into account potential market failures in the electricity market that prevent prices from incentivising power generators to keep existing capacity in the market or to invest in new capacity. Without state intervention, the Polish electricity sector may face increasing risks of future blackouts. Capacity providers have been and will be selected on the basis of competitive auctions on a regular basis. Neighbouring EU capacity providers can compete for a certain amount of capacity. By 2030, a large share of the existing conventional capacity will be withdrawn from the market due to the end of the operational age of power plants and non-compliance with the instrument of Best Available (BAT) standards.

Two weeks later, on 21 February, the European Parliament voted for a new power market design for 2030 that promotes the further expansion of renewables in the member states’s national generation mix and decreases coal consumption by setting new emission limits for national CMs. In addition, the new electricity market design seeks to newly balance responsibilities for renewables, self-consumption and consumer rights, including with a new pan-European entity for distribution system operators (DSOs). Furthermore, the new design supports the TSOs proposal to increase the capacity on cross-border interconnection up to at least 75% to be reserved for the market from 2025. The ITRE MEPs gave the rapporteur, MEP K. Karins, a direct mandate to begin negotiations with the Council of Ministers on a revised electricity regulations governing the European power markets. The expected negotiations with member states and the Commission might last at least until autumn, but probably taking longer.

The Commission’s last-minute proposal for a 550gCO2/kWh has been further tightened by the Parliament. This is aimed at preventing any public funding for future coal power plants, and could have far-reaching and even unintended implications and consequences for the approved CM of Poland as well as other EU member states historically dependent on coal and lignite as:

– The new standards should already be introduced at the end of 2018 (at earliest) for new power plants and five years later for existing plants, whereas the Council (i.e. member states) wants to postpone it to 2025 and 2030 respectively.

– By limiting the capacity mechanisms to a maximum of only 5 years and shortening the capacity the capacity agreements to just one year (whereas support schemes in general are currently approved by the Commission for 10 years), the European Parliament might undermine predictability for investors in mid-and long-term. As such, it is also threatening a sustainable security of supply in a rapidly changing energy landscape with the introduction of numerous disruptive technologies of digitalization, electrification, robotics and artificial intelligence.

– The Parliament’s proposal would introduce different solutions for different kinds of capacity mechanisms as the Parliament’s design proposal has exempted „strategic reserves” from the 550gCO2/kWh standard largely due to Germany’s insistence on ists „strategic reserve”-model dedicated to lignite plants. By limiting annual emissions for these strategic reserves just to 200kgCO2/KW (not per unit of production – kWh), it allows even the dirtiest plants to be operated for some time (according to some estimates, some 500 hours for lignite and 600 hours for hard coal). Therewith, it appears that the Parliament’s design has privileged the capcity mechanism model of “strategic reserves over a market-wide CM in contrast to the Commission’s traditional preference for more market-oriented and technologically-neutral CMs.

Any efficient functioning of the European electricity market requires clear, non-discriminatory rules and stable regulatory frameworks with consistent signals to investors, which is dependent on an efficient functioning of the national electricity markets. Therefore, the Parliament and the Council with its member states need to review those unintended consequences and impacts of the Parliament’s proposal, which itself is a bureaucratic compromise between various factions and national objectives, but ultimately may not deliver the results as intended with coherent national CMs for the Single Market.